Recorded at CAPA Americas Aviation Summit, 16-17 Apr 2018

ICF Aviation Update

ICF Aviation Principal Carlos Ozores provides insight into potential traffic growth in Argentina, the wave of potential JVs poised to form in Latin America, the market potential for LCCs and ULCCs in South America and how different governments approach aviation in the region.


Carlos OzoresArgentina is one of the most underserved, I'd say, middle-income countries in the world. If you look at their GDP per capita, it's very similar to their neighbor, Chile, for instance. And yet, you have ... I don't have it off the top of my head, but the travel propensity in Argentina is less than half of what it is in Chile. So, that means that if all else being equal, more people should be traveling.

But, we've done analyses that we think between two and three times the current level of traffic in Argentina without really anything other than just deregulating the industry. The issue that you've had is that for many years with the previous government, you had policies that restricted airline supply by having on the domestic market ... You had minimum and upper fare bands, so that prevented airlines from truly deploying revenue management, offering more expensive fares to capture people who are willing to pay. But when airlines are able to charge more, they're also able to charge much less, and so you're able to capture a much larger part of the market.

In Argentina, it's remarkable. You have about 50 or 60 million bus passengers that are traveling long distance. These are trips between six and 18 hours. They're just used to going from Buenos Aires to Mendoza, Buenos Aires to Cordoba ... These are overnight trips. These are routes that should be flown. We think that with this government, the Macri government, the first thing that they've done is to eliminate the upper fare band. That allows airlines to have much more upward flexibility in pricing. The other thing they've done is to allow ... to issue licenses to new airlines. You've had Avianca come in. The owners of Avianca, the Synergy Group, have bought an airline in Argentina from the president, Macri. They've launched. This year you have Flybondi that launched. Flybondi is backed by serious investors. They had $75 million of start-up funding. Cartesian is the main fund, but then you also have Michael Cawley and Michael Powell from Ryanair and from Wizz Air behind them.

These are serious people looking at this market. We think that the entry of new players is going to really help to catapult that traffic 2-3 times. We estimate that within the next 6-7 years, you should see a doubling or a tripling of the market.

I would just say, this all depends, though. Obviously, the market is there. What they need, though, is for the government to accompany this process by continuing to reduce the barriers to business. They still need to remove the lower fare band, which is going to allow airlines to truly implement the low-cost pricing. I'm talking about the $1 fare or $5 fare. That today is not possible. That's a big part of getting people to try travel for the first time.

You need to deregulate the [ground handling 00:02:54] market. You need to really lower some of the costs, reduce fuel pricing. All of these things need to accompany to truly have a thriving domestic aviation industry.

Right now, the wave that we're seeing in the region is the JVs. There's already a lot of talk of JVs. You have, for instance, between LATAM and American Airlines, LATAM and IAG ... They pretty much have the JVs in place on paper. They're just waiting for final approval. For example, the Brazilian Senate, about a month ago, finally approved the open skies with the United States. Now it's waiting for the President's approval, and there's a very strong expectation that the President will sign. The party that promoted this initiative in Congress is aligned with the President. That needs to go to the U.S. D.O.T.

The first wave of consolidation is going to be through these JVs. It's going to allow, in one end, LATAM and American to work more closely together. I think we're going to see ... There's already talk of United and Avianca. It's natural that you're going to see a closer relationship between those carriers. Then, you have Delta that has equity investments in Aeromexico and in Gol. I think it's the natural course of things. It's the way in which these airlines can strengthen their positions and be better positioned to compete against the low cost, which are also coming into their home markets.

If we look at Mexico, Mexico is a mature market for LCCs. The government issued licenses for LCCs back in 2005, which is more or less when Volaris, Interjet, which we'll put into this LCC category. They're more like a hybrid ... and Viva started flying. Today, these carriers combined have about 60-65% of the market, which is probably the highest level of LCC penetration anywhere in the world. I would say, by all means, LCCs have probably exceeded expectations in Mexico.

Where else do we have LCCs in Latin America? You have Colombia. Viva Colombia started in about 2012. Today they have about a 12% market share. In terms of their presence in the market, it's acceptable. Is it where they would have liked it to have been? I think they may not have reached their full expectations yet, but I think it's an airline that's here for the long term. In fact, the Irelandia Group bought out the Mexican investors, so now they're the sole owners of this business. Declan Ryan is down there running the airline with the intention of truly solidifying and growing its position. They've recently expanded into Peru. They're looking at setting up a base in Ecuador. If you ask me, I think that maybe they expected a bit more, but they're in a good position.

JetSmart in Chile, it's very recent, so it's difficult to really appreciate. But, they've already ... I don't know what market share they have. From what I understand, they're very satisfied with their recent performance. Flybondi is too soon to tell. But I think so, in the whole, they're doing reasonably well.

If we think about the large economies, the large air travel markets, I think without question the most progressive is Chile. From the very beginning, Chile realized that they're a country that's an extreme south of the continent, so they're far from everything. They're never really going to be a hub the way a Panama City is or a Dubai. Being far, and being an exporter of products like salmon, fresh fruit, they realized, "We need connectivity." So they took a very progressive approach to use your term and from the very beginning they've had universal open skies policies with any country that's willing to reciprocate. They don't have any restrictions on foreign ownership. They don't require crews to be Chilean nationals. They also don't have any restrictions on cabotage. So, a foreign airline can fly domestic segments in Chile. We see the benefits of this. It's been a flourishing market for aviation, which hasn't prevented LATAM, which started off as a national carrier, from also thriving. Chile goes to show that you can be very flexible and still support a successful airline business.

This has also led to the entry of JetSmart and carriers like Sky that are turning around their business to become more LCC, but they're doing well. I'd say another one that gets a lot of attention in the region is Panama. Panama is the base for Copa Airlines, which is probably the most remarkable success story in Latin American aviation, one of the world's most successful airlines in terms of profitability, in terms of operational reliability. They fly to something like 75 destinations in the continent. This is all thanks, also, in one part Panama's fantastic geographical location, but also to policies that have allowed Copa to fly anywhere. Panama does have foreign ownership restrictions, but they don't limit or restrict the nationality of crews. If you fly on Copa, you're going to have crews from all over the world. This is what, thanks to these government policies, that the airline has been able to achieve what it has.

Those are two good examples. If we look at some of the negative examples, I would say Argentina was, for a long time, an example of a very aggressive country with a highly regulated industry. That's why the market, especially the domestic and international markets have been suppressed. Now, with the current Macri government, we've seen 180 degree change in the outlook. I've been in this industry for 15 years. I've been to numerous conferences in the region. I have never seen a government team that is as committed to the success of aviation, and that is working in such a coordinated fashion as Argentina is today. I think that Argentina will very soon, if things continue as they are, as they intend to, will be in the list of very progressive nations.

They still have very high taxes on aviation, on it's airports, fuel. They still have some fare regulations. They still have restrictions on route rights, and the international markets are still limited bilaterals. Some very much so. Until not too long ago, between Colombia and Argentina, you had the bilateral allowed four weekly frequencies. Four flights per week for each country. You compare that to Panama, I think Copa has maybe five daily flights into Buenos Aires alone. Argentina has a way to go to really open up, and we're going to see the benefits of this.

The other major market that is still ... needs to come a long way without question is Brazil. Brazil has the world's most expensive or second-most expensive jet fuel for domestic flights. Even though Brazil produces most of it's jet fuel nationally, they price all of this fuel as if it was imported, and then they apply very high levies and state taxes, up to 25% on domestic jet fuel. That's why you don't have any LCCs in Brazil. This makes the cost of flying a domestic flight very, very prohibitive.

They've deregulated fares. They've deregulated the domestic route rights. In that sense, you have progress. Last year, they started allowing airlines for the first time to actually charge for ancillaries, charging for bags which before then was considered a fundamental passenger right.

The last thing, in Brazil, last year you also had important labor reforms. That allows airlines to have more flexibility with their staffing. All these things are moving the supply curve to the right and allowing airlines to be much more efficient, to reduce pricing, but I would still consider Brazil a fairly complex and difficult place for airlines to do business.

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